Sustainable finance is about incorporating sustainability into investment decisions. It is motivated not just by high investment returns but by simultaneously achieving good outcomes for others.
It’s a broad term that can encompass many things. In the investment context, it tends to embrace environmental, social, and governance (ESG) issues. Sustainable finance aims to achieve high investment returns as well as maintaining or improving these pillars.
Sustainable finance is a concept that has been around for at least 25 years. Large superannuation funds in Australia have offered sustainable investment options for at least 20 years. Investment industry authorities have been referring to related terms such as ethical investment or responsible investment for some time. However, recent years have seen sustainable finance step into the spotlight.
Why does sustainable finance matter?
Major challenges like climate change and forms of socio-economic inequality will likely require large sums of money to prevent substantially worsening outcomes.
Necessary changes such as clean energy transitions require large amounts of upfront finance. It is unlikely that governments alone can finance these transitions. Private capital via sustainable investment will be crucial.
What are examples of sustainability in finance?
When it comes to ESG issues, there are two key planks to sustainable finance: excluding adverse investments and including beneficial investments.
Common exclusions relate to fossil fuels, weapons, gambling, alcohol, tobacco, and human rights violations. Common inclusions relate to energy savings and energy efficiency, renewable energy and affordable housing.
The next frontier for frequent coverage by sustainable finance may be biodiversity.
How do sustainable finance decisions impact the ESG factors of an economic activity or project?
They do this by directly or indirectly making more funds available for projects with better ESG characteristics. Also, growth of sustainable finance can provide an incentive for firms to improve their ESG characteristics, so that they are not excluded from sustainable finance.
What is the difference between traditional finance and sustainable finance?
With sustainable finance you tend to see a greater focus on longer-term issues associated with environmental and social considerations. For example, sustainable finance may consider avoiding investments that increase climate change risk or that exacerbate forms of socio-economic inequality. Traditional finance has a narrower focus on maximising investment returns for a given level of risk.
Sustainable finance recognises that environmental and social issues pose risks for the future, even if these risks have not been quantified in past investment returns.
The government has recently released Australia’s Sustainable Finance Strategy. What is its goal, and what are its pillars?
The broad goal is to support sustainable finance in Australia. This entails providing a framework that can help reduce barriers to sustainable investment, and ultimately promote more sustainable investment.
The three key pillars include improving transparency on climate and sustainability (including supporting Australia’s path to net zero), building financial system capacity and promoting the role of the Australian Government as an engaging leader.
Improved transparency on sustainability can come from new frameworks that provide comprehensive and comparable financial information for investors. A new labelling system for investment products which are promoted as sustainable can also help investors. Australia’s Sustainable Finance Strategy is intended to promote these developments.
One example of building financial system capacity is through the $1 billion Household Energy Upgrades Fund, which seeks to promote discounted consumer finance for the housing sector.
The Australian Government’s role as an engaging leader may also include drawing attention to financing needs for our Pacific neighbours.
Macquarie University achieved a sustainability milestone in 2023 with the establishment of a five-year sustainability-linked loan framework. This facility is the largest of its kind for the higher education sector in Australia, and the University has committed that all savings made over the life of the loan facilities will be directed to disadvantaged students through scholarships.
The framework builds on an innovative Sustainable Bonds Framework. Launched in 2018/19, the bonds funded the construction of our 5-star Green Star Student Accommodation, Central Courtyard and Lincoln buildings. The naturalisation of Mars Creek was also funded through the bonds and has encouraged the return of aquatic and birdlife to the re-vegetated creek-side area.
Dr Rohan Best, pictured above, is a senior lecturer in the Department of Economics at Macquarie Business School, a member of the Centre for Corporate Sustainability and Environmental Finance, the Smart Green Cities Research Centre, and the Transforming Energy Markets Research Centre.
The Macquarie Business School made a submission to the Sustainable Finance Strategy consultation process. This was a joint submission with Cyan Ventures, which is a sustainability consulting and project development firm that focuses on accelerating the deployment of sustainability technologies. The submission is expected to be published soon on the Federal Treasury website.
